Morgan Stanley may have to revise its 2018 oil market outlook after last week benchmarks recorded the lowest price levels since last November, before OPEC and non-OPEC producers agreed to reduce their combined output.
Equity researcher Martijn Rats said in a note that contrary to the investment bank's base scenario for 2018, in which it forecast a stable price environment, U.S. drillers have been adding rigs at a rate that suggests in a year, output would be much higher than it is now.
Last Friday, Baker Hughes reported the number of active rigs had climbed for the 16th week in a row. At 877, active rigs are now 462 more than a year ago. The output increase will be gradual and will not be immediately evident, but it will become evident next year, as it may be as large as a million additional barrels per day, Rats warned.
Even at current production levels, OPEC is losing market share to U.S. producers, according to Rats, as its output is declining while U.S. output is growing. According to Rats, "We doubt OPEC will allow this to go on for long."
In fact, the analyst believes that OPEC will not extend its production cut agreement beyond this year, despite comments to the contrary from Saudi Arabia's and Russia's energy ministers. In separate statements yesterday, Khalid al-Falih and Alexander Novak said their governments were willing to extend the cuts for more than six months after the initial June 30 deadline to stabilize prices.
This means that even if OPEC—and Russia—are not too happy with the increase in U.S. production, they have but few useful moves in the current environment. The problem is particularly serious for OPEC producers who have pledged deeper cuts than Russia.
If the parties extend the agreement for more than six months, they will continue losing market share – inventories will go down but so will exports. If, as Rats believes, they decide to open the tap after 2017 ends, this would mean 1.2 million barrels daily from OPEC coming back into the market plus more than 300,000 bpd from Russia, which has made clear its intentions to start ramping up production the first chance it gets.
By Irina Slav for Oilprice.com
